Can someone explain Partnership Loss Limitations on K-1s - Basis, At-Risk, Passive Activity rules in simple terms?

The partnership loss limitation rules can definitely be confusing! There are three main hurdles your losses need to clear before you can claim them: 1. Basis limitation: You can't deduct losses that exceed your "basis" in the partnership. Your basis is essentially your investment in the partnership (your contributions plus your share of partnership income minus distributions and previous losses). 2. At-risk limitation: You can only deduct losses to the extent you're financially "at risk" - basically money you've invested or amounts you're personally liable for. 3. Passive activity rules: If the partnership is a "passive activity" for you (meaning you don't materially participate in operations), losses can only offset other passive income. For your situation with section 1256 contract losses, these are generally considered investment/trading losses, not passive activity losses. The bigger question is whether you have sufficient basis to claim them. Your K-1 should have come with a supplemental statement showing your ending basis. If your basis is higher than the losses, and you haven't received distributions that would reduce it, you're probably fine. Would you happen to know if the partnerships sent any supplemental statements about your basis or capital account?

I went through similar headaches with partnership K-1s last year. After countless hours researching, I discovered a tool that really helped me understand my basis limitations and exactly how to handle complicated K-1 entries. It's called taxr.ai (https://taxr.ai) and it can analyze your specific K-1 situation. What I liked is that it breaks down exactly what your basis is in plain English and tells you if you're limited in claiming losses. You can upload your K-1s and it flags specific issues like basis problems, at-risk concerns, and passive activity limitations. It was eye-opening for me because I was about to claim losses I wasn't entitled to until the tool caught it! The reports explained exactly why certain losses were limited and which weren't. For section 1256 contract losses like yours, it should tell you directly whether you need to complete any additional forms beyond Form 6781.

Just wanted to follow up and say I tried taxr.ai after reading about it here. Really impressed! I uploaded my K-1s and within minutes had a clear explanation of my partnership basis. Turns out I've been calculating it wrong for years - no wonder I was confused. For my situation, it showed me that what I thought were passive losses were actually investment losses that weren't subject to the passive activity rules. It explained exactly where each K-1 item needed to go on my return and highlighted the few items that had limitations. Wish I'd found this years ago. Would have saved me so much stress and probably prevented some mistakes on my past returns.

After spending HOURS on hold with the IRS trying to get someone to explain these partnership basis rules to me last year, I finally found a service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was shocked it actually worked because I'd been trying for weeks to get through on my own. The agent walked me through how to calculate my basis and explained that for section 1256 contract losses, I didn't need to worry about the passive activity limitations since they're considered investment losses, not passive losses. The IRS person also confirmed that as long as my capital account was positive and I hadn't received distributions beyond my basis, I could claim the full losses on Form 6781. Saved me from filing an overly complicated return!

I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it myself because I was desperate for answers about my partnership K-1s. It actually worked! I got a call back in about 35 minutes and was connected to an IRS agent who explained exactly how to handle my section 1256 losses from my partnerships. The agent confirmed that these aren't subject to passive activity limitations and walked me through a basis calculation to make sure I could claim the full loss. Never been so happy to be proven wrong. Saved me from filing an amended return after I realized I'd been handling these K-1 items incorrectly for years.

Another thing to understand about basis is that it changes every year. Your initial basis is what you invested, but it increases with: - Additional capital contributions - Your share of partnership income - Your share of partnership debt And decreases with: - Distributions you receive - Your share of partnership losses - Decreases in your share of partnership debt Many tax programs don't track this automatically, so you need to keep your own records. For 1256 contract losses, the at-risk rules usually aren't an issue unless you have some unusual arrangement where you're protected from loss.

Does anyone know if trading losses from section 1256 contracts are considered investment income for the Net Investment Income Tax (3.8% tax)? My CPA says I can use these losses to offset other investment income subject to NIIT, but I'm not sure.

I went through a very similar situation last year with K-1s showing section 1256 losses, and I can share what I learned after consulting with a tax professional. The good news is that section 1256 contract losses from partnerships are generally NOT subject to the passive activity loss limitations, even if you're not actively involved in managing the partnership. This is because they're treated as investment/trading losses rather than passive business losses. For the basis limitation, if your combined capital accounts show $45k positive after the losses, you almost certainly have sufficient basis to claim the full $16k in losses. The key thing to watch for is whether you received any distributions during the year that might have reduced your basis below what's shown in the capital account. Here's what I'd recommend: 1. Report the 1256 losses on Form 6781 as you mentioned (60% long-term, 40% short-term) 2. Check if either partnership sent supplemental statements about distributions or basis adjustments 3. If you're still unsure about your exact basis calculation, consider keeping detailed records going forward since basis carries over year to year The partnership loss limitation rules are definitely confusing when you first encounter them, but for your specific situation with investment partnerships and 1256 contract losses, they're likely not going to be a major obstacle.